Check 21: Where’s the Spending?

Despite an enormous amount of attention and hype, the impending activation of the Check Truncation in the 21st Century Act (Check 21) on October 28, 2004, has so far not resulted in a rush of bank spending.

Despite an enormous amount of attention and hype, the impending activation of the Check Truncation in the 21st Century Act (Check 21) on October 28, 2004 has so far not resulted in a rush of bank spending. In discussions with companies targeting the check imaging and truncation market, it has become clear to Financial Insights that banks are holding back on exchanging check images instead of paper checks for a variety of reasons:

Recognition that Check 21 does not require image exchange, but only acceptance of a specially formatted print-out of an image, called a substitute check. As a result, only 2 out of 17 banks we spoke to in February and March 2004 are planning to exchange images on October 28; the remainder plans to just accept substitute checks.

Uncertainty about the model for image exchange. Banks have two choices: direct exchange of images between banks, as promoted by SVPCo and Endpoint Exchange, or exchange of images between banks and a central archive, represented by Viewpointe Archive Services. The centralized archive approach has cost advantages, since images only need be exchanged as needed and can be stored in one location. However, many banks are reluctant to give up control of their images to a third party and are planning to retain their own internal archives. Some questions, such as the frequency with which images would have to be retrieved from a central archive, can only be answered once Check 21 is in effect. Accordingly, many banks are putting off commitments until then.

Slowed investment in check image exchange due to continuing merger activity like that among JPMorgan Chase, Bank One, Bank of America and FleetBoston Financial. Since these banks are highly influential with other banks, uncertainty about their ultimate image exchange policies has a ripple effect that slows decision-making across the country. In addition, bank consolidation reduces the number of checks that need to be exchanged.

Concern over image quality. In the paper check world, a bank can send off a check for payment without worrying about its readability; not so with an image. Image quality standards are still not resolved, so truncating banks face the risk that their images will be acceptable to some banks and not to others. As a result, most banks are proceeding slowly and cautiously with small pilots, working out the kinks in their internal processes and experimenting with different image quality standards.

Perceived vendor immaturity: vision exceeds capability at many vendors. While most vendors claim full support of check imaging, truncation and exchange, many of the core components have been introduced within the last year and have only been implemented at a few banks. Some banks have had trouble even getting proposals from their suppliers.

Emerging worry over fraud and security: A rising chorus of complaints claim check images will make common security standards, such as microtype and watermarks, useless without providing viable substitutes. In fact, some physical security features, such as the word 'VOID" appearing when the check is copied, can be triggered by the imaging process itself. While check truncation does allow more effective screening for suspicious transaction activity, and tellers can still scrutinize checks for signs of counterfeiting, many banks (and their customers) are concerned about counterfeit check stock making its way into the check stream.

Without image exchange, there is not much spending, because most banks have already invested in imaging technology for internal uses, such as research, customer service or image statements. Based on our interviews, we do expect substantial spending to come out of Check 21, in the range of $1.6 to $2.0 billion in both 2004 and 2005, but with the bulk of the 2004 spending coming in the second half. As so often happens with new technology, it appears that the move to electronic check processing will be both slower and more difficult than we expected a year ago.